Tax on Rental Income in India: How Rent Is Taxed
If you own a property and rent it out, that rent is taxable as income from house property. The good news is the law gives you a flat deduction plus a few more, so you rarely pay tax on the full rent. Here is how it works.
Key takeaways
- Rent is taxed under the head income from house property.
- You get a flat 30 percent standard deduction on the net annual value, no bills needed.
- Municipal taxes paid and home-loan interest are also deductible.
- Tenants must deduct TDS on rent above certain limits.
How the taxable rent is calculated
Start with the gross annual value, usually the actual rent received for the year. Subtract the municipal taxes you actually paid to arrive at the net annual value. From that, take the standard deduction and any home-loan interest. What is left is added to your income and taxed at your slab rate.
| Step | Item |
|---|---|
| 1 | Gross annual value (rent received) |
| 2 | Less: municipal taxes paid |
| 3 | = Net annual value |
| 4 | Less: 30% standard deduction (Section 24a) |
| 5 | Less: home-loan interest (Section 24b) |
| 6 | = Taxable income from house property |
The 30 percent standard deduction
The biggest relief is the flat 30 percent deduction on net annual value under Section 24(a). It is meant to cover repairs and upkeep, and you get it whether or not you actually spent that much. You do not need any bills or proof. On a net rent of Rs 3 lakh a year, Rs 90,000 is deducted straight away.
Home-loan interest set-off
If the rented property has a home loan, the interest you pay is deductible under Section 24(b). For a let-out property there is no upper cap on the interest deduction, unlike a self-occupied home where it is capped at Rs 2 lakh. This can turn the rental into a loss that offsets other income, subject to the Rs 2 lakh annual cap on setting house-property loss against other heads.
Municipal taxes
Property tax paid to the municipal body is deductible, but only in the year you actually pay it, and only if you, the owner, pay it rather than the tenant. Keep the receipts.
TDS on rent
Tenants have obligations too. An individual paying rent above Rs 50,000 a month must deduct 2 percent TDS under Section 194-IB. Companies and others paying rent above Rs 2.4 lakh a year deduct 10 percent under Section 194-I. If you rent to such a tenant, factor this in, you claim the TDS back when you file your return.
How to legally lower your tax on rent
- Always claim the 30 percent standard deduction, it needs no proof.
- If there is a home loan, claim the full interest on a let-out property.
- Pay and record municipal taxes in your own name to deduct them.
- Split ownership with a spouse so the rent is taxed across two lower slabs.
FAQ
How much rent is tax free in India? No rent is fully exempt, but the 30 percent standard deduction, home-loan interest and municipal taxes often reduce the taxable amount sharply, sometimes to nil.
Is the 30 percent deduction on gross or net rent? On the net annual value, that is rent minus municipal taxes paid.
Is there a cap on home-loan interest for a rented flat? No cap on the interest itself for a let-out property, though house-property loss set off against other income is capped at Rs 2 lakh a year.
Does the tenant deduct TDS on my rent? Yes, if an individual pays over Rs 50,000 a month (2 percent) or a company pays over Rs 2.4 lakh a year (10 percent).
Related: TDS on rent, HRA exemption guide, and rental yield in India.
